Arab Today, arab today british economy faces tentative upbeat
Last Updated : GMT 05:49:56
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Arab Today, arab today

British economy faces tentative upbeat

Arab Today, arab today

Arab Today, arab today British economy faces tentative upbeat

London - XINHUA

The upturn in the British economy in the first half of the year was described by a leading economist as a \"tentative upbeat.\" \"We are going to see a recovery of some sorts but one of the big risks is that before the Bank of England (BOE) gets a chance to tighten monetary policy we might be back into another downturn,\" George Buckley, chief UK economist with Deutsche Bank told Xinhua. Buckley said that in recent years the BOE had been able to use either monetary or fiscal policy to tackle the threat of recession. \"Now it is a different scenario; the BOE would argue there is still a lot ammunition left to fight another recession -- for example Quantitative Easing (QE) or perhaps telling the markets they are going to keep interest rates on hold for a long time, or switching into longer term assets or buying private sector assets,\" said Buckley. But with regards to fiscal policy, there was no room for manoeuvre, he said. Buckley said that policy makers should be wary that if there is a downturn in GDP it could migrate quickly into a recession. \"A short one like the last recession but we could see a prolonged period of growth followed by a recession,\" said Buckley. However there were clear signs that the British economy is improving and moving towards a more stable and prolonged recovery. \"The data has been a lot better. We have got very low interest rates. Foreign exchange is at levels it ended up at after 2009 when the currency fell very sharply; we have QE worth 375 billion pounds sitting in the economy taking away the need for people to buy 375 billion pounds worth of gilts, so they can direct that money towards risk assets such as equities or corporate bonds,\" said Buckley. \"All of that is going to help; we are just not sure how long it will take to get back on its feet without that help. In other words how long will it take to get a turnaround in policy, getting policy rates back up to what you might call a normal level,\" he added. Previous attempts by the decision makers in the BOE to raise interest rates above their historic low of 0.5 percent, where they have been since 2009, were undermined by events before they could get enough support. CONSUMER SPENDING Several mechanisms could help drive the British economy towards sustainable growth, closer to its trend levels of 2-2.5 percent, including consumer spending. This has been rising for the last six quarters, although the last quarter was only 0.1 percent up. However, Buckley pointed out that consumer spending in Britain was still below peak levels and lagged behind all other G7 nations, bar Italy. Buckley said, \"We are still in terms of spending relative to peak the second lowest in the G7. The reason for that is inflation which has been high and that has eroded purchasing power which has eroded consumer spending weakening it very sharply.\" But Buckley was optimistic that inflation was likely to move lower, and consumers were rebalancing their finances, increasing their saving ratio, and reducing their levels of debt as a proportion of income. \"Income gearing, debt interest paid by households, fall to its lowest on record which means they have more to spend on non-interest items like retail,\" said Buckley. \"Confidence is looking more positive; there are a lot of reasons why consumer spending can continue to grow, albeit not at the same rates as the past. That is important because the consumer is worth about two thirds of the economy,\" he said. EURO AREA CRISIS Meanwhile, the British economy faces headwinds from the euro area, said Buckley. \"There is a crisis on the doorstep; we are still in crisis mode. There is a lull in the proceedings, but you would not put it past the markets to be concerned again if the recession continues because the one thing we need in order to bale out the euro area is growth -- and that has not been forthcoming,\" he said. The second quarter of this year looked to be better than Q1 where there was the fifth straight quarter of a contraction in output, said Buckley, but there was still much further to go. British exports had been weakened by a rise in sterling from the middle of 2011 to the end of 2012. \"There is always a lag between changes in sterling and weak exports,\" said Buckley. Continued austerity policies implemented by the government to control near-record levels of public debt had probably taken one percent out of the economy each year, and households had not yet fully rebalanced their budgets. Budget growth between 2008-2012 had been an impressive 22 percent, said Buckley, however only 5.5 percentage points of that was from wages growth. This posed a stumbling block on the road to full recovery. \"Almost half was due to government payments over that period; you can see it is not really an environment conducive to huge spend when a substantial proportion of your income is being generated by unemployment benefit,\" said Buckley. A rise in inflation because of weak productivity was a source of concern, said Buckley, but it was offset at the moment by an accompanying decline in wages which was limiting the rise in unit labor costs.

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